Friday, January 29, 2010

Ben Wins! and Other Good News

Yesterday the Senate approved Ben Bernanke for a second four-year term as Chair of the Federal Reserve. As late as last Friday that approval was in doubt, as a number of senators announced they would not support him. However, the White House put on a full court press over the last week and garnered enough support for the second term. The vote was 70 for and 30 against approval. The negative votes were the most in history for a chairman, a vivid illustration of the bad blood that still exists between Congress and the Fed. The was other good news today: GDP for the fourth quarter rose 5.7%, well above the 4.5% estimate of many economist. Further, our reading of the data suggests that consumers came alive in the fourth quarter. The largest component of the data was the ongoing inventory rebuild. That is normal and a good sign that the economy will continue to grow over the coming months. Fourth quarter corporate earnings are soundly beating Wall Street estimates. Thus far with 40% of S&P 500 companies reporting, 81% of the companies have beaten Street estimates. The big news is that year over year earnings for the Index, as we predicted, are higher. Indeed, on average they are 75% higher than a year ago, when the financial sector had huge losses. The average surprise has been almost 13%. That is a very high surprise rate. It's too soon to call fourth quarter earnings a big success. There are still 300 companies that have not reported and many of them are banks, but the early signs are very good. A Little Not-So-Good News: The market has not been kind to investors in the last two weeks. The main reason for the slide has been the news coming out of China that their central bank is attempting to slow speculation in their economy. Odd isn't it that what the Chinese central bank is doing lands on the doorsteps of our stock market. Get used to it. China and Indian central bank activity will be as closely watched in the future as our own. The reason is simple: China and India have continued to grow at near double digits rates while the rest of the world has been in recession. Thus, what is going on in the Chinese and Indian economies directly impacts many US companies.

Monday, January 25, 2010

Bernanke in the Cross Hairs, Part 2

I have heard from several reliable sources, and it has been reported in the news that President Obama and key members of his staff were on the phones with senators this weekend selling Ben Bernanke for another term as Fed Chief. So far the news looks good that they were successful. Bernanke's reappointment seemed to be in doubt on Friday as two Democratic senators, Russ Feingold of Wisconsin and Barbara Boxer of California, said they would vote against him. Fears spread quickly that a wave of populism among other senators might doom Bernanke's chances. Let's face it, we have to blame someone for the banking crisis, and members of Congress on both sides of the aisles are falling all over themselves to see who can talk the toughest to the "Wall Street" bankers. Since Bernanke is Chairman of the Federal Reserve Bank, he is a banker and, thus, he is fair game to be tarred and feathered along with all the rest. The only problem is Ben Bernanke and his colleagues at the Federal Reserve may have just saved the US and the world from another 1929-type depression. He is now being blamed for bailing out Wall Street and not bailing out Main Street. Indeed, the Fed, under Bernanke's leadership, has pulled every lever known to mankind and a few that none of us have ever seen before. And they have brought a level of normalcy back to the financial markets that few would have thought possible just a year ago. Main Street may not have seen a lot of improvement yet, but with time I am confident things will be better there, as well. I know there are strong feelings in many quarters against Mr. Bernanke, but I do not believe the financial markets will react well to a change of leadership right now. Here's how Bloomberg calls Mr. Bernanke's chances in the senate, so far: Yes, or inclined to yes---34 No, or inclined to no-----16 Undecided, or unknown-50 He needs 60 votes to assure reappointment. The vote is expected to come on Friday.

Friday, January 22, 2010

Bernanke In The Cross Hairs

A number of prominent Democrats have signaled that they will not support Fed Chairman Ben Bernanke's re-nomination to the Fed. They say they want to purge the government of anyone who had a role in the banking crisis. My guess this upsurge in anti-Bernanke sentiment may be more a reaction to the upset victory by Republican Senator Scott Brown in Massachusetts than the qualifications of Mr. Bernanke. The stunning loss of the "Kennedy Seat" and the apparent derailing of the government's health-care takeover, has left many in the Democratic party searching for a new mantra. That mantra appears to be congealing into "We inherited these problems with evil bankers from George W. Bush, and anyone associated with the Bush Administration must go." That argument would seem to be a little dog-eared after twelve months. However, because Ben Bernanke was appointed by George W. Bush and was on the job in the early months of the banking crisis, he now has cross hairs on his back. The thought that politics would remove Mr. Bernanke from his critical position at the Fed is chilling. Economists from both sides of the aisle have extolled Mr. Bernanke's leadership of the Fed during these most difficult times. Indeed, the financial markets would not take kindly to the forced retirement of Chairman Bernanke. If those people who are now opposing Bernanke were to triumph over their own President's endorsement, in my judgment political and economic chaos would reign. I believe a significant part of the recent tailspin in the markets is due to worries that there may be a Bernanke revolt underway. Let's hope that less political, cooler heads prevail, or we may find ourselves in the middle of another financial crisis.

Tuesday, January 12, 2010

Less-Bad Earnings Finally . . . Turn Good

If the analysts are right, over the next few weeks, US corporations will report higher quarterly earnings on a year over year basis or the first time since October of 2007 . The better earnings will largely be driven by the big banks. If you recall, the fourth quarter of 2008 was just a disaster for the big banks, as they were forced to take huge write offs in their mortgage businesses. Even though many big banks are still struggling, some have turned the corner and will show huge gains. Over the last three quarters, S&P 500 earnings have gotten progressively less-bad, with the third quarter being down on a year over year basis by about 10%. And, even though earnings are expected to be higher for the fourth quarter, they will still be nearly 25% below their October 2007 peak. It is clear that even though the analysts' optimism is welcome news, there is still significant slack in corporate America. At present the analysts are predicting that corporate profits for all of 2010 will be approximately 25% higher than 2009. Almost all industry sectors are expected to show earnings increases, with tech and industrial earnings growth leading the way. We will chronicle this earnings season in weekly reports as we have done over the past year. Our belief is that S&P 500 earnings for the fourth quarter will again beat analysts' estimates by a good margin. As we reported in a previous blog, we believe 2010 economic and earnings news will be better than investors are now forecasting. This out performance should continue to lift stock prices, at least through the first six months of the year. Earnings reports will begin in earnest next week. We'll make our first earnings report of the season late next week.